The dispersion-correlation map helps us to understand the dynamics of market volatility better. Last month we observed high levels of correlation in markets across the globe following the unexpected results of the Brexit referendum.
High correlation levels can be a reflection of market fragility. However, as current dispersion and correlation levels indicate, the heightened readings at the end of June resolved in a benign way.
S&P 500 dispersion is currently sitting near the lowest levels seen in 25 years. Correlation is also below average. In remarkable contrast to June 30th readings, both dispersion and correlation have declined sharply for the S&P Europe 350. Dispersion, notably, is below average while correlation is not much above average. In Asia, the narrative is similar.
There’s no telling which direction dispersion and correlation levels are headed but one definite implication of current low dispersion levels is that the market environment for active managers to add (or subtract) value is constrained.